Profit From These Special Situations

In his book You Can Be a Stock Market Genius, author and investor Joel Greenblatt highlights the opportunity hidden in mergers and acquisitions, spinoffs, and restructurings. Some deals are so complex that the true value of a stock won't be unlocked until well after the fact, giving savvy investors a chance to get in early and grab hold of shares at a discount. Huge profits are possible, and Greenblatt achieved 50% annualized returns for a decade investing in them.

We'll look at the latest announcements presenting an opportunity for profit and pair that with the views of the 180,000 members of Motley Fool CAPS to see what they think of the businesses involved. If the best and brightest in the investment community like these stocks, it may be worth your time to dive in further.

But not every deal is worth your money. It takes diving into the filings to understand the nuances, so don't use the stocks below as a buy list -- more due diligence will be needed on your part.

Company

CAPS Rating (out of 5 max)

Type of Situation

Terms

Inhibitex (Nasdaq: INHX  )

****

Acquisition

Bristol-Myers Squibb (NYSE: BMY  ) to pay $26 per share cash

Orchard Supply Hardware Stores (Nasdaq: OSH  )

****

Spin Off

Spun off from Sears Holdings (Nasdaq: SHLD  ) 12/30/11

Again, this is just a starting point for further research. Do your homework before committing real money to these special situations.

Isn't that special?
Particularly after Inhibitex reported positive mid-stage trials of its INX-189 hepatitis C therapy, we've been saying the biotech is a prime candidate for a takeover, though I've thought GlaxoSmithKline, Merck, or Abbott Labs were prime contenders for being the lead suitor, being as they're waist-deep in the hep C field.

Of course there's still plenty of candidates out there for them to consider buying. After Roche bought Anadys Pharmaceuticals for $230 million, Gilead Sciences buying Pharmasset (Nasdaq: VRUS  ) for $11 billion, and the willingness of Bristol-Myers to drop $2.5 billion on Inhibitex, investors might want to look towards Idenix Pharmaceuticals as the next logical choice. It just got the green light from a safety panel to begin clinical trials on its own hep C drug, IDX184.

With both boards approving the Bristol-Inhibitex merger, there doesn't appear to be any serious roadblock to the union, but shares are trading somewhat below the buyout offer, meaning there's some latent doubt. The price Bristol is paying is on the high side, considering INX-189 is still in early stages and it expects earnings will be impacted by $0.04 per share this year and a nickel in 2013, with earnings diluted through 2016. Inhibitex itself has been incurring losses for the last few years.

Highly rated CAPS All-Star and biotech guru zzlangerhans wonders if there is some preferred-share deal that hasn't been disclosed that would be able to reconcile the valuation differences.

The finance portals have the total number of outstanding shares of Inhibitex as 78.3M, which would indicate that a $2.5 billion buyout would equal $32/share. The finance portals now list the market cap of Inhibitex as 1.86B, far short of the $2.5B that BMS will pay. There doesn't seem to have been any recent dilution to increase the share count since the last quarterly statement, so what gives? Is there a hidden component of preferred shares that will suck away a lion's share of the buyout funds?

Let us know in the comments section below or on the Inhibitex CAPS page if you think there's more than meets the eye with the offer, then add it to your watchlist to see how successful it is.

Will it blossom?
Finally on its own, Orchard Supply Hardware Stores got off to an inauspicious start by reporting an expected loss for the year and seeing its stock now trading 40% below its $25 per share offering price. Spun off from floundering Sears Holdings, investors need to decide whether the specialty retailer serving the repair, maintenance and improvement needs of homeowners will be able to capitalize on its 80-year history, or if it will be more akin to the Home Depot Villager's Hardware fiasco, an attempt by the big box DIY giant to front a local hardware store feel — after it had killed off all the mom-and-pop shops. Big Orange ended up abandoning that effort.

As a stand-alone operation, Orchard could prosper away from the Sears muzzle, but with only 87 stores, all located in California, it's got its work cut out for it. And it's not like there's not competition in the space. Home Depot and Lowe's dominate, but Ace Hardware and the few remaining local hardware stores (not to mention Sears' own smaller-footprint stores) make it very crowded.

Investors who got shares as part of their ownership of Sears may end up with a very nasty tax bill as a result of the way Sears spun off Orchard. There could be a lot of don't-want-it built into this company that, coupled with its actual growth prospects, may make it an interesting addition to your portfolio.

I rated it on CAPS to outperform the market because I think the market sold off the shares because of its close relationship with Sears, perhaps not understanding the terms of the spinoff. That leaves it with room to expand over the next few years as it's seen as a better value than its one-time parent. Add the stock to the Fool's free portfolio tracker to keep track of how it performs.

Checking the mercury
Digging into these deals is exactly what the analysts at Motley Fool Special Ops do every day, finding the best situations to invest in.

And if you want instant access to three special under-the-radar companies quietly cashing in on the booming smartphone and tablet PC markets, check out The Motley Fool's latest special free report: "3 Hidden Winners of the iPhone, iPad, and Android Revolution." The report is yours today, absolutely free.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter serviceshave recommended buying shares of Abbott Laboratories, Lowe's Companies, GlaxoSmithKline, The Home Depot, and Gilead Sciences. Motley Fool newsletter serviceshave recommended writing covered calls in Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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